Corruption in Latin America

Defining corruption

• “Official corruption” is the misuse of public office for private gain. – Public office– Private gain– Misuse

Consequences

• It breaks the cycle of democracy

• It increases poverty and inefficiency

• It generates more maldistribution of resources.

• It delegitimizes the state (and democracy)

• It can threaten democratic stability

How much corruption is there

in Latin America?

• How to measure: perceptions

• Latin America is high but not the worst

• No change in the last decade

• Worst offenders: – Haiti, Venezuela, Paraguay– political parties

• Is there “complicity” on the part of developed countries?

An economic theory of corruption • Corruption is a function of potential profit

from corruption:– Profit = expected gain minus expected

penalty • Expected gain (amount of gain * likelihood) is a

function of – discretion and – available resources

• Expected penalty (amount of penalty * likelihood) is a function of

– transparency and – effective enforcement mechanisms

To reduce corruption

Reduce expected gain, increase expected penalty, or both

Reducing expected gain

• Profit = discretion + resources, so– Reduce discretion:

• transparency, oversight, clear rules, overlapping functions, clear objectives

– Reduce amount of resources handled by individual office holders:

• Limit state purchases and sales, size of government programs

Pitfalls of reform

• One prescription has been to shrink the state to reduce expected gain– fewer resources handled means fewer opportunities

to gain, – but it can also mean an increase in discretion and a

reduction in transparency

• Shrinking the state implies:– Budget cuts in

• Spending programs or• Regulatory programs

– Privatization of state enterprises

Budget cuts

• Spending cuts: – increase incentives if they just make the lines longer,

the application processes more complex, or the number of offices that respond to the public less numerous

• Instead, raise the bar for eligibility, or reduce demand somehow (by creating non-state opportunities)

– If you cut buying in half, and there’s no place for suppliers to go in the private market, you increase the incentive for bribes by the suppliers

• Try to provide alternative markets or increase monitoring

Budget cuts

• Regulatory programs: – Ongoing operations:

• Less inspectors may mean fewer bribes, but• It will be cheaper to bribe than to fix, so it could be

counterproductive

– Pre-certification:• Reducing personnel drastically increases scarcity

and thus incentives for corruption

Privatization

• In the long run, this should reduce corruption. • But the process may create opportunities for corruption:

– creating lists of pre-qualified bidders– Large state enterprises are hard to value, and it’s easy to favor

corrupt insiders with corrupt auctions

• The sale can be accompanied with preserving the monopoly (formally or informally).

• And after the sale the firms retain a relationship with the state, and may make payments for favorable treatment

• If it looks like the result will be an inside deal and continued corruption, better not to sell.

Privatization

• Temporarily but vastly increases the resources being handled

• Is a one-time opportunity, so creates strong incentives to get it while you can

• Might simply externalize corruption

• Or might create long-term dependencies / oversight that create ongoing opportunities for corruption

Increasing the expected penalty• What is being done?

– Freedom of Information Acts– Lobby regulation– Financial Disclosure Statements of Public

Officials– Regulation of conflicts of interest– Ombudsman organizations– Protect Freedom of the Press– Improve prosecutorial performance

But who will run these institutions?Problem is:• WEAK institutions

– Courts, auditors, bureaucrats

• WEAK civil society– No independent press, co-opted organizations like

unions and trade associations

• WEAK opposition– No political fragmentation, or on the other hand, too

many small, weak parties that depend on government resources to compete

• Question is: Are these things improving right now in Latin America?

Conclusion

The basic lesson of the economic model is that corruption can best be fought by

– limiting the opportunities and rewards for paying and receiving payoffs,

– not by searching for saintly people to staff government offices and run for office.